Lenders, Lessors and Lessees, the Importance of SNDAs

Lenders take into consideration a whole slew of factors when determining whether to make a loan secured by real property.  One of the factors, that ultimately adds value to the real property and the improvements thereon, is the presence of lessees (tenants) and the existence of lease agreements.  While the presence of lessees and the existence of leases agreements adds value to the underlying secured asset, it can also create a layer of complexity with respect to the relationships of the various parties, a lender, a lessor and a lessee.  These issues are typically reconciled through a Subordination, Non-Disturbance and Attornment Agreement, or a SNDA.

In essence, the SNDA attempts to ensure the following: (1) that the lessees right in the underlying real property, the leasehold interest, will be subordinate to the lender’s deed of trust or mortgage; (2) that the lessees rights with respect to the real property and the use thereof will not be disturbed by the lender if the lessee and lessor abide by certain terms and conditions; and (3) that the lessee agrees to attorn to a successor lessor if the lender must foreclose on the underlying real property.  While this is generally what the SNDA seeks to accomplish, the agreement is much more involved as the parties are in different bargaining positions with potentially adverse objectives.

By entering into a SNDA, the lessor, the lender and the lessee can address certain issues associated with foreclosure, refinance of the secured real property or sale of the secured real property.  While SNDAs are typically three party documents between the lender, the lessor and the lessee, it is generally the lender and the lessee that are most concerned with the terms and conditions of such.

Some of the more common provisions that a lender might require in a SNDA are as follows: (1) the waiver by the lessee of claims against the lender for the default by the lessor under the lease agreement; (2) the requirement that the lessee provide the lender notice of any default under the lease agreement; (3) a statement that the lender will not be bound to any amendment to the lease agreement made by the lessor and the lessee (unless first approved by the lender); (4) a prohibition against subletting the premises; (5) the requirement that any insurance or condemnation proceeds be applied first to the outstanding loan balance; and, (6) the indemnification by the lessee of the lender for any liability the lender might incur by reason of environmental contamination or otherwise.  A lender may require other terms and conditions depending on the nature of the transaction, but these are an example of what a lessee (and a lessor) can expect from most lenders.

The lessee has a fundamental objective in a SNDA: the assurance that its leasehold interest will not be disturbed in the event of foreclosure or otherwise.  In many jurisdictions, including Mississippi, the foreclosure of a deed of trust or mortgage automatically terminates subsequent (or subordinate) leasehold interests regardless of whether the lessee is made a party to the foreclosure.  It is for this reason that a lessee wants a carefully drafted and thoroughly negotiated SNDA in order to protect its investment in the leased premises.

It is imperative that the parties involved in a loan transaction that is secured by real property address the issues related to foreclosure, the refinance of the secured real property or the ultimate sale of the secured real property.  It is critical to the negotiation process to understand the relative bargaining positions and objectives of all the parties involved in the transaction, the lender, the lessor and the lessee.  It is also of the utmost importance for the paries to understand that each transaction is unique and should be approached, from a planning perspective, with that uniqueness in mind.